A capital-gains tax deduction for Oklahoma-based companies is unconstitutional, the Oklahoma Court of Civil Appeals ruled Thursday.
The court, in a 3-0 ruling, reversed an opinion by the Oklahoma Tax Commission, which denied an appeal from a California company stating it also should receive the deduction.
The appellate court ruled the Oklahoma capital gains deduction, which took effect Jan. 1, 2006, violates the commerce clause of the U.S. Constitution.
A spokeswoman for the Tax Commission said attorneys were still reviewing the ruling, handed down Thursday afternoon.
It was unknown how much money the state takes in from out-of-state companies paying the capital gains tax, she said. It varies depending on the amount of capital gains claimed by out-of-state companies that pay corporate taxes in Oklahoma and whether they meet the criteria of the deduction.
What it is
Capital gains include money from the sale of real estate, stocks or personal property.
Oklahoma companies may claim the capital gain deduction if they own the assets being sold at least three years before the transaction. Out-of-state companies have to own the property for at least five years to claim the deduction, according to the law.
“Discrimination in the current provision lies in requiring a nonresident company (one not primarily headquartered in Oklahoma) to make a longer term investment in the state than a company headquartered in Oklahoma … in order to quality for the benefits of capital gains treatment,” Judge Jane Wiseman wrote.
CDR Systems Corp., formed in California with headquarters in Florida, claimed the Oklahoma capital gains deduction on its 2008 Oklahoma small business corporation income tax return. The company, which manufactures equipment for telephone, water and electric companies, has a facility in Waynoka.
CDR sold all of its assets to another company in 2008 and reported gains of $49.8 million. CDR claimed the Oklahoma capital gains deduction, resulting in an exclusion of $3.6 million from Oklahoma taxable income. The Tax Commission disallowed the deduction and CDR appealed.
CDR in its appeal said the commerce clause prohibits measures intended to benefit in-state companies, relying on an earlier court case ruling that a state tax that favors in-state business over out-of-state business for no other reason than the location of its business is prohibited by the commerce clause.
The Oklahoma Court of Civil Appeals found that the Oklahoma capital gains deduction discriminates against out-of-state companies because it affords Oklahoma companies different treatment for similar taxable events.
“Non-Oklahoma companies — by definition those not ‘primarily headquartered' in Oklahoma — do not enjoy the same benefit,” Wiseman wrote. “A company not primarily headquartered in Oklahoma only receives the same treatment if the property sold has been owned for five years, no matter how sizable or long-standing an investment the company has made in Oklahoma's economy.”
Tax Commission attorneys argued the Legislature determined that having a company's primary headquarters in Oklahoma for at least three years amounted to a significant investment in the state that was sufficient to grant the deduction.